TOPICS > Economy

Unemployment Woes

March 5, 2004 at 12:00 AM EDT


MARGARET WARNER: It was a bleak jobs picture today. Not only did the economy create just 21,000 jobs last month — 100,000 less than expected — but the number of new jobs created in December and January were revised downward by 20 percent to just 105,000 combined. About 150,000 new jobs are needed every month just to keep pace with workforce population growth.

Joining me now to explain today’s numbers and what they mean are Lakshman Achuthan, managing director at the Economic Cycle Research Institute, an independent forecasting group in New York; and Rebecca Blank, an economist and dean of the Gerald Ford School of Public Policy at the University of Michigan. Welcome to you both.

Mr. Achuthan, when one of our reporters talked to you yesterday, you believed today’s numbers would show 125,000 to 150,000 jobs growth. Is it fair to say you were shocked by today’s numbers?

LAKSHMAN ACHUTHAN: Well, I guess I always get shocked by the numbers when they come out, but I certainly was surprised that it was as muted of a rise because the leading indicators of the employment cycle have been rising for the past few months. And, in fact, with today’s report they even kept rising.

MARGARET WARNER: And by leading indicators, you mean economic growth?

LAKSHMAN ACHUTHAN: Well, indicators specifically of employment growth, like the employment diffusion index that tells you how broad, how many different industries are hiring, or initial claims for unemployment benefits which have been trending down, typically those anticipate a recovery in jobs, and they have been saying that we would have a recovery in jobs. I think it points that this time it truly is different.

MARGARET WARNER: Ms. Blank, were you surprised by the numbers today, just 21,000 jobs created?

REBECCA BLANK: Well, I wasn’t surprised in the sense that it continues the trend of recent months of bad news in terms of the job side. But my colleague is absolutely right. All of the other indicators suggest much higher economic growth and in past recessions we’ve always seen a substantial increase in the job market by this time, so this is a real mystery, something different we’ve seen in any recent recovery post-World War II.

MARGARET WARNER: Before we get to why, Ms. Blank, where were the job losses greatest?

REBECCA BLANK: Manufacturing, which is where they’ve been the greatest for some period of time. There was a little bit of job growth in professional services and business services but largely outside manufacturing and that, things were just flat.

MARGARET WARNER: Mr. Achuthan, how do you explain this anomaly? I mean, the fact is also that economic growth has been up the last couple of quarters. The stock market is up. What’s going on here?

LAKSHMAN ACHUTHAN: Well, I mean, I think the anomaly is a perfect way to describe this. Last summer we saw a 20-year high in GDP growth and today we saw a 20-year high in the duration of unemployment.

Typically, you should not have that kind of divergence. So when we’re looking to see what is different this time, Ms. Blank was just pointing out, it is really centered in the manufacturing sector.

To put it in perspective, since the beginning of the recession, the manufacturing sector has accounted for 111 percent of all the jobs lost in the United States. And only 11 percent of the work force actually works in manufacturing.

So when we look at what’s happening in that sector, we see that outsourcing, moving those jobs abroad; and productivity gains account for the ability of people to continue to produce more without hiring people.

MARGARET WARNER: Ms. Blank, do you agree with that, that the two culprits are outsourcing, which is of course the favorite political culprit this political season, and productivity growth; that is, more workers being able to do more without hiring more workers?

REBECCA BLANK: Yes, but I do think there is a third issue that’s possibly going on as well which is simply we’ve been in a very unusual political situation internationally. We’ve had a major terrorist incident since the beginning of this recovery, and we’ve just fought a war with Iraq. And those two things create caution on the part of employers.

And I can see a lot of employers who are simply saying look, let me just wait another month until things settle down before I really start hiring seriously. It is very hard to disentangle those effects from what is happening on the more economic side.

MARGARET WARNER: Mr. Achuthan, how much — you talked about manufacturing jobs going overseas, I mean, is that a completely irreversible trend? That’s my first question. And secondly, what about white color service jobs we’ve heard so much about, the jobs being outsourced to India?

LAKSHMAN ACHUTHAN: Well, I think on the manufacturing side, it seems as though it is pretty much irreversible. I would call it a structural change, a permanent shift.

If you think about it, there are two very long-term trends that are at play. We’ve had a long-term movement towards globalization, the emergence of free markets around the world that are trading with one another. And we’ve also had a Federal Reserve, which has been fighting inflation for a few decades and they’ve won.

Now if you’re a company which is trying to make a profit, you are having a very difficult time raising your prices. You have no pricing power. So the only way to increase your profits is to reduce your production costs. And the low interest rate environment makes it easier to invest in equipment that increases productivity and the globalization and emergence of India and China make it easier to access production facilities abroad.

And I think firms that are surviving, that have survived this recession and the strange recovery, have done so by taking advantage of those two factors. I think it’s very focused in the manufacturing sector because it is easier to do with tradable goods.

With the service sector, I think it’s a little overblown. I think in areas like software, for example, there are job losses abroad to India, for example. But I think in general, it’s more difficult to ship a service job abroad because many of those things need to be performed within the United States.

REBECCA BLANK: I disagree.

MARGARET WARNER: Ms. Blank, please…

REBECCA BLANK: I agree that there is almost surely some additional shifting with jobs overseas happening but I have to say we don’t yet have the data to really know that’s what’s happening right now in terms of the bad employment numbers that are coming in.

It is quite possible that given the technology changes of the last decade, that it really was the recession that gave employers a chance to take their breath and to catch their breath and to start taking advantage of the more user friendly software and due to technological changes that essentially save labor and had nothing whatsoever to do with shifting jobs overseas.

MARGARET WARNER: And do you think that the investment, or some might have head overinvestment in the ’90s in telecommunications, Internet, broadband, that employers are now really making use of that?

REBECCA BLANK: Yes, that’s one very clear theory. But I have to emphasize that everything is in the category of theories. We are just facing a situation that we haven’t seen before historically. And it is recent enough that we don’t have the data to nail it down and say it’s clearly this, it’s not clearly that.

MARGARET WARNER: So, Mr. Achuthan, if basically economists as good as the two of you are as forecasters are somewhat baffled by this, then do you have any theories on what it will take to get new jobs being created in the kinds of numbers we are talking about to even keep pace with working-age population?

LAKSHMAN ACHUTHAN: Well, I think that we are on track, at least in the near term, to having steadily increasing, not as fast as we would like, but increasing job growth in the next quarter or two. The leading indicators of employment are pointing in that direction. If you look at separate leading indicators of the economy, they actually remain quite robust. So it doesn’t look like there is any new downturn ahead.

I suspect that the lag time for job creation has just been a little bit longer because of this structural change, which has sped up. You see, that’s the real key here. Without the ability to raise prices, any business rationally tries to cut its costs in order to increase its profits. I suspect that they will continue to do so. They’re doing it at a very fast clip now. I don’t see why they would stop.

MARGARET WARNER: All right. Mr. Achuthan and Ms. Blank, thank you both.